Consumers Are Spending Money They Do Not Have

When The Great Depression hit the United States in 1929, then-president Herbert Hoover decided to do something about it. He decided to lift the spirits of the American people. As he put it, “Prosperity is right around the corner.”

Theoretically, this seemed to make sense. If the people were depressed and worried about where the next buck or dime would come from, they would pinch every penny and hold on to anything they had. But, if they were confident that the future was bright, they would live accordingly and not worry about where the money would come from tomorrow. Unfortunately, so long as Hoover was president, we never turned that corner.

Although we are not in a depression as yet, there are people in public life who try to cheer the American consumers — and investors — into spending their money. They commonly refer to the “strong consumer activity.” And, in part, they are right. Considering the fact that several million American jobs have been lost during the last two years, consumer activity is holding up. But the reason is that they have something now that they did not have in 1929. It is a magical instrument called the credit card.

To make a purchase, you don’t need money. All you need is a little celluloid card. It is convenient but cruel. Handle it too often and it bites your hand. Soon the amount of money owed to the credit card company becomes backbreaking. In the year from June 2002 to June 2003, consumer bankruptcies rose to a record-breaking 1.6 million.

Put plainly, the big boom in consumer activity was built on a house of cards — credit cards. And now, the house comes tumbling down.

Another piece of “cheerleading” that is now getting currency is the low level of inventories in retail stores. This is featured as evidence that we are about to see a turnabout in the economy.

Here’s the way the reasoning runs. If inventories are low, that means consumers are eating up the products. The stores must now order replacements to fill their shelves so that they will be able to meet the demands of their customers. And that’s the good news.

But is it? If consumers have been gobbling up products, a prudent storekeeper would keep his shelves well stocked lest consumers come to buy and find that what they want is not there. If inventories are low, as they are at present, it is due to the reluctance of retailers to make new purchases at a time when they are finding it difficult to sell what they have. What’s the point of adding to the inventory when you are unable to sell what you have? In short, the presently low inventories are a sign of stagnancy, not strength.

Even our high unemployment rate — the highest since 1994 — is held up by the cheerleaders as a positive sign because it dropped momentarily by 0.2%. Actually, while the official jobless rate fell slightly, the number of jobless rose. But, ironically, because hordes of job-seekers who have been looking unsuccessfully for work over several years simply stopped searching, the jobless rate fell because those who dropped out of the job market are not counted as “unemployed.”

Put plainly and painfully, the cheerleaders are counting on myths to get consumers to spend money they do not have. Will it work? It didn’t with Hoover. It won’t with President Bush. It won’t because cheerleaders are not leaders. They make noise, but they score no goals.